From Communists to Foreign Capitalists.

Leeds, Eva Marikova

From Communists to Foreign Capitalists

Nina Bandelj

Princeton University Press: Princeton, NJ, 2008, 303pp.

doi:10.1057/ces.2008.53

Central planning was replaced by a system in which the search for profit results in ubiquitous change, stress, and insecurity. Economists often ignore the human cost of change. Sociology, although it does not have a model for change, studies human interactions and reactions to changes in the institutional environment. An economic sociologist, Bandelj sets out in this book to examine and analyse foreign direct investment (FDI) in 11 Central European countries from this broader viewpoint.

Bandelj recognises that FDI involves market and social relationships, and she tries to specify some structural demand factors for such investments, while most economists estimate reduced forms from the very beginning. Of course, economies do not exist in a vacuum but are embedded in legal, political, and social structures. Bandelj repeatedly uses the words 'embedded' and 'embeddedness' and even 'disembeddedness' to capture this feature, but in trying to show that everything matters, she never specifies the most important factors that economists ignore at their peril.

New 'post-socialist' governments had to find a way to attract and incorporate foreign capital by creating new institutions and laws to guide foreign investors. Bandelj draws a parallel between free economies and centrally planned ones: 'Both systems are governed by a particular power structure, either the Communist Party or neoliberal elites and international organizations'. In my opinion, this ignores crucial differences.

As a former Yugoslav national, Bandelj recognises that each country had different institutions, different degrees of central planning, and different transformations. She describes the transformation process as a mixture of 'privatization, democratization, regionalization, and globalization', which varied according to initial conditions, 'the prominence of nationalism', as well as 'integration into the European Union'. Each country had to go about 'legitimizing FDI practice'. For Bandelj legitimisation is more important than laws, which were not necessarily followed because people relied on old modes of operation and on old relationships.

Empirically, Bandelj sets up a regression whose dependent variable is 0 for years when a country has no FDI agency and no sale of banking or telecommunications assets to foreigners, 1 for years during and after one of these events occurred, and 2 once both of the events have occurred. Her independent variables included 'international pressures, domestic political and cultural forces, and institutional path dependency'. Several panel regressions reveal that 'mimetic isomorphism'--the average value of legitimisation in other countries - has the largest coefficient and greatest statistical significance.

For a regression like this, an ordered probit would have been more appropriate. There is also simultaneity bias: while low income may have persuaded some countries to legitimise early, legitimisation in turn raised income, hence the net association tests insignificant. Bandelj interprets the statistical insignificance of income levels as supporting her hypothesis of the primacy of culture and politics.

A more interesting exercise tests whether FDI flows into the 11 countries were created by the search for profits or by preexisting channels. If economic forces predominate, the 'countries considered more economically prosperous and politically stable should receive more investment from world's top investors'. While this 'horizontal' investment in prosperous countries is consistent with new growth theories, it ignores vertical FDI to poorer countries, which is in line with the theory of conditional convergence. Hence it is not surprising that the coefficient on host country GDP/capita just misses statistical significance at the 10% level. Several other independent variables that proxy for preexisting channels, such as the presence of minorities of the investor country in the host country and the distance between countries, are statistically significant. Bandelj concludes that 'social and political ties' explain FDI better than the search for high profits.

Bandelj illustrates social and cultural factors with a case study of Slovenes' distrust and dislike of Italians. Evidently, Slovenes refuse to sell their assets if they suspect that Italians could be their managers. Later, Bandelj compares Slovenia with Estonia, two small countries with vastly different FDI percentages. But beyond stating that Estonian FDI is consistent with Estonian market reforms and Slovenian FDI with gradual Slovene restructuring, the book has little to say about the contrast.

Bandelj is sceptical of profit maximisation because a businessman cannot be certain of the consequences of his actions and because an analyst cannot infer profit-maximising goals from businessmen's behaviour. Rather, she argues, businessmen collect little information, follow routines, muddle through, and improvise. With examples from the actions of three Americans, she asserts that such behaviours are common in post-socialist countries. There, we confront a highly uncertain world of old prejudices and new policies, where any action will have unpredictable consequences and thus is not likely to result in maximal profit. In face of globalisation, she writes, '[E]conomic actors rely on their business connections and personal ties. But they also rely on their cultural understandings and affinities. They use political alliances and vie for power'.

The book raises many important issues, but, in my opinion, it delivers less than it promises. Bandelj tries to incorporate a basic critique of economic theory into her analysis of FDI, but the critique distracts her from fully analysing the adoption of FDI in transforming economies. Focusing on process and relationships without generating conclusions leaves the reader dissatisfied.

Eva Marikova Leeds (1,2)

(1) Temple University Japan, Tokyo, Japan

(2) Moravian College, Bethlehem, PA, USA